Federal oversight over Medicaid supplemental payments needs improvement, which could lead to substantial cost savings

Why Area Is Important

Strong federal oversight of Medicaid is warranted as the program continues to grow in size and cost, and GAO has had long-standing concern with the adequacy of federal oversight of state Medicaid supplemental payments. Each state administers a Medicaid program and covers a variety of health care services for low-income individuals. The federal government oversees states' Medicaid programs and, by a formula established in law, pays from half to more than three-fourths of each state's Medicaid expenditures. Subject to certain requirements, states establish Medicaid payment rates for providers and may make supplemental payments to providers, which are separate from and in addition to standard state Medicaid payment rates. States make two general types of supplemental payments. First, Disproportionate Share Hospital (DSH) payments are required under federal law to be made to hospitals that serve a large number of low-income individuals and are designed to help offset hospitals' uncompensated costs for serving Medicaid and uninsured low-income individuals. Second, states often make non-DSH Medicaid supplemental payments, which are also funded in part with federal dollars, for example to help offset the costs of care provided to individuals covered by Medicaid.

What GAO Found

Varied financing arrangements that states use to make Medicaid supplemental payments can inappropriately increase federal Medicaid matching payments. GAO found that, under certain financing arrangements, some states paid state or local government providers supplemental payments that greatly exceeded standard Medicaid rates, resulting in large matching payments from the federal government. Some states required providers to return most, or all, of the large supplemental payments to the state, which the states then used for other purposes. Such financing arrangements threaten the fiscal integrity of Medicaid's federal and state partnership because they effectively increase the federal Medicaid share above what is established by law, and there is no assurance that federal Medicaid funds are used for Medicaid purposes.

The Centers for Medicare & Medicaid Services (CMS) within the Department of Health and Human Servicesthe agency that oversees Medicaid at the federal levelhas taken action to curb inappropriate payments, but gaps in oversight remain. For example, in 2003, CMS began an initiative to closely review supplemental payment arrangements and required states to end those it found inappropriate; however, in 2008, GAO reported that CMS had not reviewed all arrangements to ensure that payments were appropriate and used for Medicaid purposes. In 2009, GAO found that ongoing federal oversight of supplemental payments was warranted, in part because in two of the four states reviewed the states did not comply with federal requirements to account for all Medicaid payments when calculating DSH payment limits for uncompensated hospital care. States calculate these limits to provide assurances that DSH payments to hospitals do not exceed individual hospitals' actual costs of providing services. For a small number of hospitals, the state calculation errors resulted in payments in excess of hospital limits. In two states, a state-operated hospital received combined Medicaid supplemental and standard Medicaid payments that exceeded the hospital's total operating costs by 3 percent in one case and 6 percent in another.

In 2011, under federal regulations, improved transparency and accountability requirements will become effective for state DSH payments, including standards for state calculations of DSH payment limits. Also, states will be required to report DSH payments on a facility basis and to obtain independent audits for their DSH payment reports and calculations. Under the Patient Protection and Affordable Care Act, reductions in federal DSH expenditures will occur in future years. At the same time, similar requirements are not in place for non-DSH payments, which appear to be increasing. In 2006 states reported making $6.3 billion in non-DSH supplemental Medicaid payments, of which the federal share was $3.7 billion, but not all states were reporting their payments. By 2010, this amount had grown to $14 billion, with a federal share $9.6 billion, however, according to CMS officials reporting was likely incomplete. Requirements for DSH supplemental payments, such as standards for calculating the amount of the payments and reporting of payments on a facility specific basis, do not apply to non-DSH supplemental payments. Further, processes have not been implemented to ensure that all supplemental payment arrangements are reviewed.

Actions Needed

In light of the magnitude of Medicaid supplemental payments and recent reported growth of non-DSH supplemental payments, along with past concerns about the inappropriateness of some supplemental payments, further action by CMS is warranted to ensure that these payments are appropriate and used for Medicaid purposes. Some key prior GAO recommendations aimed at improving federal oversight of supplemental payments have not been implemented. In particular, GAO has recommended that CMS establish uniform guidance for states that sets acceptable methods for calculating non-DSH payment amounts, require facility specific reporting of non-DSH supplemental payments, and develop a strategy to ensure all state supplemental payment arrangements have been reviewed by CMS.

Given concerns associated with Medicaid supplemental payments, strong and sustained CMS oversight is necessary. Ensuring that the federal government provides matching funds only for appropriate supplemental payments could result in substantial costs savings.

Framework for Analysis

The information contained in this analysis is based on work GAO has conducted over the past 15 years and recent work to update the status of prior recommendations and payment amounts.

Area Contact

For additional information about this area, contact Katherine Iritani at (202) 512-7114 or iritanik@gao.gov.